China’s economy rebounds in the fourth quarter but still vulnerable

BEIJING -- China’s economy rebounded in the final quarter of 2012 but optimism was tempered by warnings the recovery could be vulnerable to a possible downturn in global trade.

Growth rose to 7.9 percent in the three months ending in December as the world’s second-largest economy limped out of its deepest slowdown since the 2008 global crisis, data showed Friday. That was up from 7.4 percent the previous quarter and raised total growth for the year to 7.8 percent -- China’s weakest year since the 1990s.

"We see growth rising above 8 percent in the first half of 2013," said Mark Williams of Capital Economics. "I don’t think China is an economy in need of further stimulus at this point."

The slowdown was due largely to government controls imposed to cool a real estate boom and surging inflation fueled by Beijing’s massive stimulus in response to the 2008 crisis. But it worsened as demand for Chinese exports dropped unexpectedly, raising the risk of job losses and unrest.

Forecasters expected a rebound in early 2012 but pushed back that time frame after demand for China’s exports was hurt by the sluggish U.S. recovery and Europe’s debt problems. Analysts say a Chinese recovery is likely to be too gradual and weak to drive a global rebound without improvement in the United States and Europe.

"The economy is not completely out of the woods yet," said IHS Global Insight analyst Xianfang Ren in a report.

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"While domestic demand looks to be coming back, it looks to be a rather anemic rebound."

This week, the World Bank cut its growth forecast for China this year from 8.6 percent to a still-rapid 8.4 percent.

Growth could suffer a setback if China’s high investment rates slacken or global trade weakens, the bank said. It said a 5 percent decline in investment could knock 1.4 percent off this year’s growth and 6 percent off imports.

Another downturn for China could send out global shock waves. It would hurt demand for U.S. and European technology and consumer goods, industrial components from Asian neighbors and iron ore, copper, oil and other commodities from Australia, Brazil and Africa.

Beijing is trying to nurture more self-sustaining growth based on domestic consumption instead of exports and investment but retail spending is rising more slowly than authorities want. That has forced the government to prop up growth by injecting money into the economy through high spending on building subways and other public works.

A survey by an industry group earlier this month found manufacturing expanded for a third month in December but at a slow pace. It said new orders overall grew but export orders dropped slightly.

The gradual recovery comes as new Communist Party leaders under General Secretary Xi Jinping take power in a once-a-decade political transition that began in October.

They are under pressure to keep incomes rising, which will require them to reduce reliance on low-wage manufacturing and investment and to make companies more efficient and productive. The World Bank and other advisers have urged them to curb the dominance of government companies and promote private business -- changes that will face opposition from politically favored state companies and their allies in the ruling party.

"Implementation has been problematic but I think the government is trying to make some progress," said Barclays Capital economist Yiping Huang.

In December, retail sales growth accelerated to 15.2 percent from a year earlier, up from the previous month’s 14.9 percent, the National Bureau of Statistics reported. Factory output growth rose to 10.3 percent over a year earlier from November’s 10.1 percent.

Consumer inflation also has ticked up, possibly complicating moves to sustain a recovery with interest rate cuts or other steps.

Inflation spiked to a six-month high of 2.5 percent in December after a freezing winter pushed up vegetable prices by nearly 50 percent in some areas. Officials say inflation so far is limited to vegetables but analysts say pressure for other prices to rise is increasing.

Higher inflation could hamper Beijing’s ability to support a recovery with interest rate cuts or more spending for fear of fueling a politically dangerous price spiral. Consumer prices are especially sensitive in a society where the poorest families spend up to half their monthly incomes on food.

Societe Generale warned this month that China still faces a small chance of a "hard landing" with growth dropping below 6 percent -- a dangerously low level. Possible triggers: A 2008-style drop in trade or a financial shock if Beijing responds to public frustration with high housing costs by overtightening controls meant to cool surging prices.

"The room for error and the likelihood of nasty unintended consequences is not negligible," said Societe General economist Wei Yao in a report.

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